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| > Investing > Fiduciary Focus |
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| The Department of Labor Didn't Say Anything, It Just Talked |
| by
W. Scott Simon
| 08-07-08 |
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Among the wonderful memories of my childhood were the times when my little brother and I got to cuddle in bed with our father on Saturday mornings. We would run in to our parents' bedroom and, after Mom got up to go fix us all a big breakfast, take turns crawling into bed to be enveloped by Dad's strong embrace. Although he wasn't a large man, his forearms were Popeye-like from the hard physical work he did growing up on his parents' farm.
One morning, when it was my turn to crawl into bed with my father, Mom yelled something from the kitchen which none of us could hear. My dad told my brother to go and see what she wanted. He did so and came trotting back with his report. "What," my father asked, "did your mother say?" My brother's reply, long since immortalized in family lore: "She didn't say anything, she just talked."
The same sentiment struck me as I read through the 31-page manifesto issued by the U.S. Department of Labor in the July 23, 2008, Federal Register titled "Fiduciary Requirements for Disclosure in Participant-Directed Individual Account Plans; Proposed Rule." More than half of this document is taken up by explanations of the 39(!) tables provided, which detail the costs ($0.7594 billion) and benefits ($6.8756 billion) of implementing the proposed rule. The proposed rule (§2550.404a-5) itself takes up less than three pages.
Although the estimated benefits of implementing the rule clearly outweigh the estimated costs, about 66.5% ($4.5666 billion) of those benefits consist of reduced participant search time while only 33.5% ($2.3089 billion) of the benefits consist of an actual reduction in fees paid by participants. It remains to be seen how plan participants will be able to transform all those search-time benefits into more dollar benefits for their plan accounts.
According to an accompanying fact sheet released by the Department of Labor, "[a]n estimated 65 million participants are covered by approximately 437,000 participant-directed individual account plans (including 401(k) plans) . . While workers in these plans are responsible for making retirement savings decisions, there is concern as to whether they have access to basic plan and investment information in a format useful to making informed decisions about management of their own retirement accounts . . The proposed regulation requires that uniform, basic disclosures be given to all participants and beneficiaries who direct the investment of assets in their individual accounts, and that investment related information be presented in a format that makes comparisons [among a plan's investment options] easy." The rule, as proposed, is to take effect for plan years beginning on or after Jan. 1, 2009.
Basic Plan and Investment Information
Advisors should understand that the essential problem with the Department of Labor's proposed rule is that it requires only basic (as opposed to complete) disclosure of investment and other costs impacting a plan participant's account balance. What's needed under this rule, instead, is full disclosure of the total economic impact that both "visible" costs (e.g., the annual expense ratio of mutual funds) and "invisible" costs (e.g., the bid-ask spreads of mutual funds) have on the accounts of participants in retirement plans. The reality of all costs, not just some, is what participants need to have disclosed to them in order to make informed decisions about their plan accounts.
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| W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understanding is the definitive work on modern prudent fiduciary investing. Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals. For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar. |
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